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Neue Unternehmergeist: Sustainable Finance for Innovation and a New Entrepreneurial Spirit

Somewhere between Schumpeter and Keynes is a sustainable theory of economic growth through innovation finance, involving both the public and private sectors

In his 1934 book, The Theory of Economic Development, Austrian-American economist Joseph Schumpeter argued that the primary drivers of innovation and economic growth were entrepreneurs, almost heroic figures who created new products, markets and ways of doing business that propelled the economy boldly into the future. He disagreed with the neoclassical economists of the time, who saw economic life as a passive affair. Instead, he sensed "a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained."

Schumpeter's Unternehmergeist was reserved for the private sector; government intervention, he argued, could only lead to inflation that, if left unchecked, would ultimately devour all available capital. But Schumpeter, who died in 1950, would not live to see just how beneficial government spending would be to spurring modern innovation in a kind of financial assembly line system that can be seen as an unintended public-private partnership. A report published earlier this year by the National Research Council, for example, found that 30 of the largest IT firms, including Google, Yahoo!, IBM, Microsoft, Apple, Dell, Cisco and Intel, can attribute a portion of their revenueâalmost $500 billion annuallyâto government-funded research.

The report reinforces the well-known "tire tracks" graphic (so-called for its appearance) from a previous NRC report that "dispelled the assumption that the commercially successful IT industry is self-sufficient, underscoring how much industry instead builds on government-funded university research, sometimes through long incubation periods of years and even decades." It is worth remembering that the internet has its roots in ARPANET, a government system connecting the computers of the Department of Defense to its projects at various universities and research laboratories.

SUSTAINABLE FINANCE FOR INNOVATION REQUIRES PUBLIC AND PRIVATE FUNDING

In May of this year, Beth-Anne Schuelke-Leech, an assistant professor at the John Glenn School of Public Affairs at Ohio State University, published an excellent paper entitled "Innovation Finance: A Synthesis of Public Funding and Private Financing of Innovation," in which she argues that innovation finance "must integrate both public and private funding."

She points out that traditional research in this field is hampered by separating the four components of the innovation processâresearch, development, demonstration and deploymentâinto artificial silos. On one side, studies of public spending center primarily on research and development. On the other, studies of entrepreneurial finance focus on demonstration and deployment. She says that this separation is "misleading," arguing that "or innovation to be successful, the whole process must be financially supported." And that support comes from both the private and public sectors.

SLASHING BUDGETS, REDUCING RESEARCH

But in the United States, public financing for innovation research is facing severe budget cuts. A study released last month by the American Association for the Advancement of Science found that automatic reductions in federal funding set by the Budget Control Act of 2011âscheduled to go into effect in January of 2013âamount to $38 billion less in non-defense discretionary spending. "Cuts of this magnitude could no doubt have significant impacts on federal funding of science, research, and innovation," the AAAS argues. "They also come at a time when federal R&D has already declined by 10 percent in real dollars since FY 2010."

Lawmakers and votersâparticularly in an election yearâmust look at public budgets with an eye to how the government's investments not only spur innovation, but connect to private sector investment to produce innovationâand jobs. In the United States, the failure to recognize this will result in an "innovation drain" that is already seeing some American VCs head to China. As Greg Clydesdale, a professor of economics at the Department of Management and International Business at Massey University, New Zealand, put it in a 2007 paper about Chinese entrepreneurship, China's "organizational structure of 'government supervision-merchant operation' became a long-lived feature of the economy... reflected the successful partnership being built between merchants and the state."

"Failing to consider the innovation process holistically," argues Schuelke-Leech, "results in a failure to understand budgetary decisions and their impact, the nexus of public-private funding on innovation, or to identify trends in one area that may impact the other." While Schumpeter saw entrepreneurs as the engine of growth, his longtime rival, British economist John Maynard Keynes, believed that it was government spending that boosted growth. Somewhere between the two is a sustainable theory of innovation finance that uses a holistic approach.

In the end, funding innovation remains within the realm of unintended, contract-free public-private partnerships. A more dedicated and transparent collaboration between corporations and governmentâone that considers all four components of the innovation spectrumâwould be a worthwhile pursuit. Perhaps a Neue Unternehmergeist, a "new entrepreneurial spirit," might see Schumpeter and Keynes not as rivals, but as collaborators.

Reynard Loki covers sustainability, sustainable finance and social innovation. He has written consumer-oriented features, exclusive interviews with CEOs, scholars and social entrepreneurs, and editorials across a wide array of environment- and sustainability-related topics. He is also a co-founder of MomenTech, an experimental production studio based in New York and Prague, whose projects have been presented around the world, including the United States, Canada, Germany, Greece, Italy, South Africa, China and the Philippines. Reynard is also the Environment Editor at AlterNet.org and a contributing author to "Biomes and Ecosystems: An Encyclopedia" (Salem Press, 2013), a reference encyclopedia that illustrates the biology, geography, history and ecological importance of the world’s various biomes and ecosystems. He is a member of Farm Sanctuary, Sea Shepherd, Global Ethics Network and New York Pigeon Rescue Central.